(Reuters) - Electronics retailer RadioShack Corp RSH.N said it may have to close stores or sell business units to improve its financial footing if business does not pick up by 2014, although analysts saw some positive signs in a quarter of weak sales.
Fourth-quarter sales dropped 7 percent, underlining the tough task facing new Chief Executive Joseph Magnacca as he tries to transform the struggling electronics chain into a specialist retailer of mobile devices.
Mobile phone sales dropped 8 percent in the quarter, in part because of a shortage of Apple Inc’s (AAPL.O) iPhone 5.
Janney Capital Markets analyst David Strasser noted that margins had stabilized somewhat in the quarter, falling just 29 basis points after dropping by several percentage points in every other quarter of the year.
“This (strategy of shifting to mobiles) along with well-managed selling, general and administrative expenses provides some structure for how the company could become profitable again,” Strasser said in a research note.
RadioShack shares were up 3.5 percent at midday.
“There is no impending negative catalyst so we might have seen some shorts who might have entered in before pulling their trades now,” Morningstar analyst Liang Feng said. “The results are relatively dismal in my opinion and no long-term thesis has changed.”
Despite its ubiquitous presence in the United States, analysts say RadioShack has not done enough to rebrand itself as a destination for mobile phones or to cater to younger customers, who would rather shop online from the likes of Amazon.com Inc (AMZN.O) or at stores run by phone companies.
The company said in a regulatory filing on Tuesday that its cash and cash equivalents fell to $535.7 million at the end of 2012 from $591.7 million a year ago, as it posted a loss of $139.4 million for the year. (r.reuters.com/qak36t)
“It’s one thing to turn around the financial performance. If they continue to bleed free cash flow, it’s going to get real ugly, real bad,” said BB&T Capital Markets analyst Anthony Chukumba.
Chief Financial Officer Dorvin Lively said on a conference call with analysts that the most significant contributing factor to the decline in sales in the quarter was the postpaid wireless business, combined with the lower margins.
The company has been trying to focus more on selling calling plans and smartphones, particularly the iPhones, as a way to pull customers into its stores but it makes less money on the iPhones than on mobile devices that use Google Inc’s (GOOG.O) Android operating system.
Tight supplies of iPhone 5 in the first two months following its launch in September hurt mobile sales, and demand had slowed by December when more stock was available, Lively said. Overall, RadioShack had 20 percent fewer phones in stock in the quarter.
RadioShack, based in Fort Worth, Texas, said it expects the slowdown in sales and margin erosion in the post-paid business to continue over the next couple of quarters.
“They don’t control their own destiny in wireless,” Chukumba said, referring to the fact that it is often carriers like Sprint Nextel Corp (S.N) that sets terms of wireless contracts.
RadioShack, which had 4,395 company-operated stores as of December 31, said liquidity could be hurt further in 2013 as it may have to issue letters of credit under a 2016 credit facility.
The company said that if operations during the year were significantly worse than in 2012, it may have to either borrow against the facility or issue additional letters of credit.
And if the trend continued or worsened after 2013, RadioShack said it may be forced to incur additional debt at higher interest rates, reduce capital spending below that required to support its current level of operations, close a significant number of stores, or sell one or more subsidiaries.
RadioShack’s businesses include RadioShack de Mexico and RadioShack.com.
RadioShack said in January that it would end its partnership with Target Corp (TGT.N) that operated Target Mobile stores at Target’s 1,500 big box locations, saying the business had generated losses since inception.
The closure of the stores, expected by April 8, will “drastically improve profitability”, Janney Capital’s Strasser said. RadioShack began operating kiosks in Target stores in 2009.
RadioShack, which has a market value of about $304 million, reported a net loss of $63.3 million, or 63 cents per share, for the fourth quarter ended December 31, compared with a profit of $11.9 million, or 12 cents per share, a year earlier.
Excluding a $67 million charge to increase a valuation allowance related to deferred tax assets, earnings were 4 cents per share. Sales fell 7 percent to $1.29 billion.
Analysts on average had expected a loss of 5 cents per share on revenue of $1.36 billion, according to Thomson Reuters I/B/E/S. Comparable-store sales fell 7 percent.
RadioShack shares were up 3.3 percent at $3.15 in midday trading on the New York Stock Exchange on Tuesday.
Reporting by Siddharth Cavale in Bangalore and Dhanya Skariachan in New York; Editing by Don Sebastian and Ted Kerr